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tax return. Petitioners have presented no evidence that Ms.
Smith unlawfully appropriated petitioner’s property intending to
deprive him of it. On the contrary, the record demonstrates that
petitioner agreed pursuant to the 1988 settlement agreement to
indemnify Ms. Smith with respect to any and all taxes for tax
years prior to 1987. As discussed above, in Smith v. Ferguson,
160 S.W.3d at 123, the court held that petitioner’s indemnifying
Ms. Smith against Federal income tax liabilities effectively
estopped petitioner from later claiming that Ms. Smith breached
the divorce agreement by failing to file a proper 1986 Federal
income tax return. We conclude that petitioners have failed to
show that the alleged failure of Ms. Smith to file a proper 1986
Federal income tax return constitutes a theft. Consequently, we
hold that petitioners are not entitled to a section 165 theft
loss deduction for the failure of Ms. Smith to file a proper 1986
Federal income tax return.
Furthermore, petitioners have failed to demonstrate that
they are entitled to a section 166 bad debt deduction related to
the alleged failure of Ms. Smith to file a proper 1986 Federal
income tax return. We understand petitioners’ contention to be
that petitioner’s payment of Ms. Smith’s 1986 tax liability in
discharge of petitioner’s obligation as a guarantor may be
treated as a worthless debt and that petitioners may deduct the
payment pursuant to either section 166(a) or (d). The record
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